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7/25/2014 10:34AM

Are Banks Ready for High Interest Rates?

It's inevitable that interest rates are going to rise. How will the banking sector handle that eventuality? John Garvey, U.S. banking and capital markets leader for PricewaterhouseCoopers, explains on MoneyBeat with Paul Vigna. Photo: iStock/Shulz.

This transcript has been automatically generated and may not be 100% accurate.

... been been been been been been been ... good morning welcome to the MoneyBeat show I am Paul vignette ... stocks down ... let's start with the opening into the Dow Jones industrial average ... down uh hundred and fifteen points Nasdaq in Essen P also in the red with the durables report this morning ... and it wasn't the the biggest thing in the world it wasn't that bad either so ... you looking at is below the ... market's been a lot of back and forth this week let's make ... the geo political concerns earnings that terrible Amazon report yesterday with but also risen in either ... couple of things floating around in the markets the Amazon down eleven percent that Primero all the primer ... is all because of their earnings report but yesterday afternoon in which they had ... while no warnings ... so that's the issue debt ... let's take a look let's talk about the bond market ... interest rates when you expected or your your interest rate report Dr hasn't happened what the ten year peaking around two point five L bought ... some point ... those rates are going to go all that is going to be for real this morning who likes for the banking sector's going to handle that and to help us were joined by John Garvey was banking capital markets leader for PricewaterhouseCoopers job openings in a ... good that he honestly I think you have to be here and and ... when that when these issues to nationalize the banks of course are not in the shop and someone knows is going to come ... but how ... big that difference automated how different the environment going to be for the banks and how you respond to that full bags of in living is you know in a low interest rate environment for awhile right so ... so it depends on the Banking sausage just a glut landing right for those banks that were big are big securitized years ... they don't have a lot of these loans sitting on the balance sheet bright so ... aam they're Nevada that probably disproportionately in terms of rises and net interest margin is a star earning more on the deposits that that has essentially been earning nothing on the deposits ... that if you look it ... that firms like you know custody banks from places like that where people park a lot of cash ... aam all the sudden you've got those from different ... net interest income ... dynamics ... Yale on the landing citing it depends on the makeup of the portfolio is well freight RU RU meows landing a lot of fixed interest rate loans that are holding on your balance sheet or is a variable ... and to what extent the you know are the are the very him variable loans on a price to read ... lending to commercial banks and within me this is too simplistic of you write and tell ... you think well the banks borrow at whatever rate they can get mail and the Dow higher but even if rates go up there still than the team that's read that ... what is the matter with the matter with the re start to the banks is that true or is that not spending depends on how they find the ... right so if you if you're funding primarily through deposits ... the the rate they are interested in is what you're paying Alan deposits which are paying almost nothing and ... frankly that is ... so the the elasticity if you will ... of of the interest rate of loan pricing ... will outpace what they paid ... and savers and so therefore there than the marginal increase ... in terms the ones that fund on the wholesale markets or whatever ... that that way to write and you know the ... in lesser some kind of ... variation between ... you know the the term that are landing in the rates that are landing so yeah that tends to move more unlock staff all of the banks preparing for this now for the just kind of living ... in old model of the local paper that that the low rates apps but it is a living for the day are they preparing for this already fighting you see in terms of a lot of the banks are are preparing for ... and and frankly I'm a lot of them would welcome it particularly ... if the rise in interest rates does not kill off for example a housing market or lower demand ... the demand side for for for loans right so ... so I think they when they would like a a much that they play became a moderate increase ... in rates without crimping demand that would be largely beneficial for